Question

At the present time, Andalusian Limited (AL) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If AL wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)A. 6.09%B. 4.87%C.5.48%D. 7.31%

Answer 1

To estimate the after-tax cost of debt, calculate the yield to maturity (YTM) of the existing bonds and adjust it for the after-tax cost by multiplying it by (1 - tax rate). The reasonable estimate for AL's after-tax cost of debt is 4.87% (option B).

Step-by-step explanation:

To estimate the after-tax cost of debt, we need to calculate the yield to maturity (YTM) of the existing bonds. The YTM is the rate of return that equates the bond's present value with the market price. Given that the bonds have a face value of $1,000, a coupon rate of 12%, and a market price of $1,329.55, we can use these values to calculate the YTM. After calculating the YTM, we adjust it for the after-tax cost of debt by multiplying it by (1 - tax rate). Therefore, the reasonable estimate for AL's after-tax cost of debt is 4.87% (option B).

Answer 2

C.5.48%

Step-by-step explanation:

Please see attachment